Canada: Factors Beware: Your Conduct Can Affect Your Contractual Rights Under The Factoring Agreement And Result In Liability For Damages To Your Clients

Last Updated: October 7 2014
Article by Jeffrey Alpert

INTRODUCTION

Factors need to beware that their conduct can affect their contractual rights under the factoring agreement and result in liability for damages to their clients. Even though a written factoring agreement contains certain provisions for the protection of the factor, the benefit of these provisions can be lost if the factor behaves incorrectly. This is what happened in a recent decision of the Ontario Superior Court of Justice in the case of Grand Financial Management Inc. v. Solemio Transportation Inc. et al, 2013 ONSC 3257, which is reported in 2 Personal Property Security Act Cases (4th) 94 and in 2013 Carswell Ont 18406.

In this case, the Court was required to consider a claim by Grand Financial Management Inc. ("Grand Financial") for breach of a factoring agreement against Solemio Transportation Inc. ("Solemio") and its principal Sami Ullah (the "Guarantor"). Both Solemio and the Guarantor brought a counterclaim against Grand Financial alleging that its actions had adversely affected Solemio's business. In reaching its decision, the Court applied a legal principle known as "Promissory Estoppel" which stopped Grand Financial from denying that the factoring agreement was terminated. The Court held that a verbal representation made by Grand Financial to Solemio terminated the Factoring Agreement, even though the provisions of the Factoring Agreement required Solemio to provide 60-days written notice of termination. In response to the counterclaim by the two defendants against Grand Financial, the Court also reviewed the conduct of Grand Financial in attempting to collect the amount owing to it by Solemio. The Court found that the actions of Grand Financial constituted intentional interference with Solemio's economic relations. As a result, the Court held that Grand Financial was liable to Solemio for damages in the amount of $175,000.00.

THE FACTS

The relevant facts were as follows:

Grand Financial offered a variety of financial services to companies in the trucking business, including the provision of cash flow to transportation companies.

Solemio was a transport company that entered into a factoring agreement (the "Factoring Agreement") with Grand Financial on July 10, 2007.

Paragraph 12.1 of the Factoring Agreement provided that the agreement shall continue indefinitely until terminated by a 60-day written notice by either party.

Paragraph 12.2 provided that, notwithstanding termination of the Agreement, Solemio shall continue to be liable to Grand Financial for the full and prompt payment of accounts purchased by Grand Financial which are then outstanding and unpaid.

The Factoring Agreement further provided that Grand Financial shall continue to have a security interest in the collateral of Solemio, including any security interests granted under any security document, until all such indebtedness of Solemio to Grand Financial was paid in full.

The Guarantor signed a personal guarantee in favour of Grand Financial in support of the Factoring Agreement.

Arnold Bros. Transport Ltd. ("Arnold Bros.") was one of Solemio's major clients.

On July 10, 2007, Grand Financial sent to Arnold Bros. a direction (the "Direction") signed by Solemio directing that, effective immediately, all of the accounts payable to Solemio shall be paid directly to Grand Financial.

The Direction was acknowledged by the logistics manager of Arnold Bros. on July 18, 2007.

According to the evidence of Solemio, it used a "quick pay" system with its customers (including Arnold Bros.) prior to entering into the Factoring Agreement with Grand Financial. Under this system, Solemio granted a discount of 2.5% to its customers if the customers paid Solemio right away.

Prior to entering into the Factoring Agreement, Solemio told Grand Financial that it was using a "quick pay" system from Arnold Bros. According to Solemio, the chief financial officer ("CFO") of Grand Financial told Solemio that if Solemio did not like the Factoring Agreement, it could go back to its old system of dealing directly with Arnold Bros.

In the first couple of weeks after signing the Factoring Agreement, Solemio sent its invoices to Grand Financial for processing. Solemio then compared the cost of using Grand Financial to the discount charged under the "quick pay" system with Arnold Bros., and concluded that the Factoring Agreement with Grand Financial was the more expensive alternative.

During a phone call at the end of July or beginning of August 2007, the Guarantor told the CFO of Grand Financial that Solemio was losing money by using Grand Financial. He also told the CFO that Solemio wanted to end the Factoring Agreement and that Solemio would not send any more invoices to Grand Financial. According to the Guarantor, the CFO of Grand Financial confirmed that the Factoring Agreement was terminated.

Solemio subsequently called the logistics manager at Arnold Bros. and told her that Solemio had terminated its Factoring Agreement with Grand Financial and would go back to the "quick pay" system. The logistics manager of Arnold Bros. told Solemio that she needed to verify this with Grand Financial, so she initiated a three-way phone conversation among Solemio, Grand Financial, and Arnold Bros. The Court found that during this telephone call, the CFO of Grand Financial agreed that Arnold Bros. could go back to paying Solemio directly and that payment would not be required to be made to Grand Financial.

The logistics manager of Arnold Bros. acknowledged that she did not confirm the above conversation in writing and that she never received a written release authorizing Arnold Bros. to make the payments directly to Solemio.

Shortly after their first three-way call, there was another conference call involving the Guarantor, the CFO of Grand Financial, and the logistics manager of Arnold Bros. Arnold Bros. was arranging for payment of both the invoices that had been rendered pursuant to the Factoring Agreement, as well as invoices submitted directly by Solemio to Arnold Bros. under the "quick pay" system. During this call, it was agreed that Arnold Bros. could make its cheques payable jointly to Solemio and Grand Financial, who would then sort out their respective entitlements. As a result, Arnold Bros. sent out two cheques for $90,970.00 and $66,111.25 payable jointly to Solemio and Grand Financial near the end of August 2007. Following the issue of the above cheques, Arnold Bros. proceeded to pay Solemio only under its "quick pay" system.

In December 2007, the logistics manager of Arnold Bros. received a telephone call from the CFO of Grand Financial, whom she described as being very angry. The CFO told her that someone was going to pay the money he was owed by Solemio and that he didn't care who. He also threatened to go after the customers of Arnold Bros.

In January 2008, there was a follow up telephone call from the CFO of Grand Financial to the logistics manager of Arnold Bros. The CFO indicated that Grand Financial was going to go after Arnold Bros. for the money that Grand Financial was owed by Solemio. After this matter was referred to the vice-president of Arnold Bros., Arnold Bros. made a decision not to use Solemio's services any further, because Arnold Bros. did not want to put their customers in jeopardy. As a result, Arnold Bros. gave a direction that Solemio trucks were to be stopped where they were located and made arrangements to pick up the loads from the Solemio trucks.

The Guarantor testified that in early January 2008, the CFO of Grand Financial called him and threatened to shut down Solemio. There was also evidence from the Guarantor of threats or intimidation in other telephone calls.

By January 10, 2008, Grand Financial proceeded to enforce its security against Solemio pursuant to the provisions of the Factoring Agreement. Grand Financial delivered copies of its security documentation to Arnold Bros. and to Solemio's banker, the Royal Bank of Canada ("RBC"). Grand Financial claimed entitlement to the funds owing by Arnold Bros. to Solemio and to the funds held by RBC in Solemio's bank account. RBC delivered approximately $35,000.00 held in the account to Grand Financial.

Solemio subsequently ceased its business operations.

Grand Financial brought an action against Solemio claiming the sum of $219,250.00 for breach of the Factoring Agreement and against the Guarantor for the same amount pursuant to his personal guarantee.

Solemio counterclaimed against Grand Financial for damages alleging that the actions of Grand Financial constituted intentional interference with Solemio's economic relations that adversely affected Solemio's business.

THE ISSUES

There were a number of issues that were raised, in the case, but the ones most relevant to factors are the following:

Does the doctrine of Promissory Estoppel preclude Grand Financial from relying on the strict terms of the Factoring Agreement and the personal guarantee executed by the Guarantor?

If the doctrine of Promissory Estoppel applies, did Grand Financial have the right to use the security provisions under the Factoring Agreement following its termination?

Have Solemio and the Guarantor established a claim against Grand Financial for intentional interference with economic relations?

If Solemio has established a claim for intentional interference with economic relations, what is the proper assessment of its damages?

THE DECISION

Issue #1 – The Doctrine Of Promissory Estoppel

The doctrine of Promissory Estoppel is a legal principle that enables a defendant to defend a claim by a plaintiff. The defendant must establish that the plaintiff has, by its words or conduct, made a promissory assurance which was intended to affect the legal relationship between the parties and intended to be acted on by the defendant. In addition, the defendant must establish that, in reliance on the plaintiff's representation or conduct, the defendant acted on it or in some way changed its position.

In this case, Grand Financial tried to argue that Solemio was bound by Section 12.1 of the Factoring Agreement which provided that the Factoring Agreement would continue indefinitely until terminated by a 60-day written notice by either party. The evidence was clear that written notice was not provided by Solemio. However, in the Court's view, the requirements for Promissory Estoppel had been established on the evidence. It was clear that there was an existing legal relationship between Solemio and Grand Financial at the time of the telephone call that took place at the end of July or beginning of August, 2007. Based on the evidence, the Court concluded that the Factoring Agreement was terminated during the above call. The Court found that there was a clear promise or representation made by the CFO of Grand Financial to Solemio that the Factoring Agreement would be treated as terminated. Solemio and the Guarantor relied upon it and they acted on this statement to their detriment. In particular, Solemio subsequently proceeded to deal directly with Arnold Bros. with respect to their invoices, and it was this action, at least in part, which led to Grand Financial taking subsequent default proceedings against Solemio.

Based on the above analysis, the Court applied the doctrine of Promissory Estoppel, which stopped Grand Financial from denying that the Factoring Agreement was terminated approximately two weeks after its execution. It was logical and reasonable to infer that Grand Financial would not rely on the other documents that were executed in connection with the Factoring Agreement, including the personal guarantee. It therefore followed that the termination of the Factoring Agreement also terminated the Guarantor's obligations under his personal guarantee.

Issue #2 – Use Of Security Provisions Under The Factoring Agreement Following Its Termination

Based on the evidence, the Court found that the debts owing to Grand Financial at the time that the Factoring Agreement was terminated were satisfied in full by the two cheques for $90,970.00 and $66,111.25 issued by Arnold Bros. Upon payment of the above amounts, Solemio had no further obligations to Grand Financial pursuant to the Factoring Agreement which, in turn, meant that Grand Financial lost the right to use the security provisions under the Factoring Agreement.

Issue #3 - Claim For Intentional Interference With Economic Relations

The three essential elements of a claim for intentional interference with economic relations are:

  • the defendant intended to injure the plaintiff's economic interests;
  • the interference was by illegal or unlawful means; and
  • the plaintiff suffered economic loss or harm as a result.

In this case, the Court found that Solemio had established a valid claim against Grand Financial for intentional interference with economic relations. Based on the evidence given by the logistics manager of Arnold Bros., the Court concluded that the CFO of Grand Financial was willing to take any steps within his power, whether lawful or unlawful, to get the money that he thought was owing by Solemio. The CFO of Grand Financial was well aware of the intended and natural consequences which he knew would flow from his deliberate actions in executing on the security pursuant to the Factoring Agreement, which he knew was terminated. By purporting to execute on this security, the actions of Grand Financial were directed at third parties (including Arnold Bros. and RBC) which then became the vehicle for which harm was caused to Solemio. Solemio was left in a situation where funds in its bank account were unlawfully seized without the authority of any Court action or judgment. The CFO of Grand Financial had acted unlawfully by demanding that Arnold Bros. pay Grand Financial the amounts owing to Solemio and by threatening to pursue the customers of Arnold Bros. These unlawful acts caused Arnold Bros. to terminate its business relationship with Solemio. Solemio suffered economic loss as a result of the actions of Grand Financial in wrongfully seizing the sum of $35,000.00 from Solemio's bank account and in destroying a significant business relationship of Solemio with Arnold Bros.

Issue #4 - Damages For Intentional Interference With Economic Relations

The Court noted that Solemio had presented virtually no evidence with respect to its claim for damages relating to the intentional interference with its economic relations. Even though Solemio had failed to provide evidence relating to its damages, it was still the duty of the Court to do its best, based on the evidence before it, to quantify the appropriate compensation owed to Solemio. Taking all the circumstances into account, the Court concluded that a reasonable assessment of the damages at large would be the sum of $175,000.00, and that Solemio was entitled to judgment against Grand Financial for the above amount.

CONCLUSIONS

The decision in this case serves as a warning to all factors that they should insist upon strict compliance with the terms of their factoring agreements. Instead of relying upon telephone conversations with Solemio and Arnold Bros., Grand Financial should have sent an e-mail, or fax, or letter to the other parties immediately following the above conversations confirming what the parties had discussed. If Grand Financial never intended to accept the termination by Solemio over the telephone, it should have confirmed in writing that the provisions of the Factoring Agreement continued to apply, including paragraph 12.1 providing for 60-day written notice of termination by Solemio. There should have been similar written confirmation regarding the position of Grand Financial that Arnold Bros. should continue to make payment directly to Grand Financial for the amounts owing to Solemio until such time as Arnold Bros. received a release in writing from Grand Financial.

The above recommendations apply to all provisions of the factoring agreement, not only the termination and payment provisions. For example, if there is a discussion between the factor and its client regarding any of the provisions of the factoring agreement such as an event of default or a breach of a covenant, then the factor should take care to ensure that the positions of the parties are confirmed in writing. If a factor is willing to waive a certain event of default or breach, then the factor should make it clear in writing that such waiver only applies to the specific default or breach and does not apply to any subsequent default or breach. The factor needs to make sure that its conduct or verbal representations do not provide its client with the opportunity to resist a claim by the factor under the factoring agreement based upon the defence of Promissory Estoppel.

Factors must also beware of a possible claim for damages by their clients for intentional interference with their clients' economic relations. If the behaviour of the factor in attempting to assert its claim against its client goes far beyond what is commercially reasonably and legally permissible, then a Court may find the factor to be liable to its client for damages as a result of intentional interference with economic relations. The decision of the Court in this case is a warning to factors that their words and actions can have detrimental consequences, including the loss of the factor's contractual rights and liability of the factor to its clients for damages.

Originally published by IFA Factoring Update and News, July 2014.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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